Uganda targets to transition from high to lower fiscal deficit and public debt levels by 2025/26 to ensure fiscal and public debt sustainability. However, navigating the fiscal transition to sustainable and favourable public finances remains uncertain, especially considering the scarring effects of the COVID-19 pandemic on the economy.
Whereas the government made a consistent commitment to reduce the fiscal deficit (spending more than collected revenues and grants) and debt in the past, these have significantly increased over time. For instance, the deficit increased from UGX 9.9 trillion in 2019/20 to UGX 13.5 trillion in 2020/21, while the debt increased from UGX 57.2 trillion to UGX 69.5 trillion over the same period. The increase could be explained by low tax collections, wasteful spending and increases in interest and non-interest expenditures.
Returning to lower deficit and debt levels is crucial for several reasons. First, high deficit and debt levels translate into high interest payments which may crowd out spending on priority sectors like education, health and agriculture. Over the past five years, the interest payments share in the budget has been increasing. In 2020/2021, the interest payments share of the approved budget was over 15 percent compared to Education (8 percent) and Health (6 percent).
Second, high public debt places an increasing burden on future generations, which must bear the cost in form of higher taxes and lower spending, especially on critical sectors.
Third, maintaining deficits and debts at high levels limits the ability to sustainably respond to shocks and crises due to limited fiscal space. Before the pandemic, Uganda’s debt-to-GDP ratio was 35.3 percent (2018/19) but it increased to 47 percent (2020/21) due to pandemic-induced borrowing occasioned by the low fiscal space.
Therefore, at the current level, the country has limited fiscal space to respond to future shocks and crises.
However, in the Charter for Fiscal Responsibility (2021/22 – 2025/26), the government targets to reduce the fiscal deficit and public debt to below 3 percent of non-oil GDP and 50 percent of GDP by 2025/26 respectively.
As etched in the charter, to achieve the fiscal deficit target, the government proposes to address tax administration inefficiencies, specifically with respect to tax collection and generate jobs and growth through timely implementation of public projects. Likewise, to reduce the public debt, the government plans to increase domestic revenue collection and use more concessional financing as opposed to domestic and commercial external debt.
Whereas the destination is certain, navigating Uganda’s fiscal transition (scale and speed) to lower debt and deficit levels remains uncertain for some reasons. First, the debt sustainability analyses by the Ministry of Finance and the IMF cannot “fully and accurately” consider uncertainty when projecting future movements in the macro indicators such as the primary balance, GDP growth and interest rates.
Second, pandemic-induced spending and borrowing are likely to increase even as the COVID-19 mist lifts because the fiscal plans (budgets) may not be aligned to the Charter. Third, whereas Uganda has a medium-term debt management strategy, it lacks a credible fiscal strategy for debt and deficit reduction. Fourth, the absence of a strong communication strategy for implementing the Charter. Lastly, past and current forecasts of debt and deficits tend to be overly optimistic – with the actual outcomes tending to be higher than the projections.
Uganda shillings. The country must be frugal to realise fiscal balance and public debt sustainability. Photo/courtesy
To reduce the uncertainty and ensure that Uganda meets the deficit and debt reduction targets enshrined in the Charter for Fiscal Responsibility, we propose the following options:
Strengthen the budget process by closely aligning budgets to the Charter. During the implementation of the first Charter for Fiscal Responsibility (2015/16 – 2020/21), lack of commitment to the fiscal deficit target was evident at the budget planning, monitoring and implementation stages, undermining enforcement and compliance. Adherence by the politicians and bureaucrats to the Charter is critical because they strongly influence the budget and its implementation.
Develop and implement a clear deficit and debt reduction strategy. The government should complement the Charter with an enforceable, politically and economically feasible deficit and debt reduction strategy consistent with the country’s prevailing economic, political, and social circumstances. The strategy should be developed in close consultation with all key state and non-state actors to ensure buy-in and commitment to the fiscal commitments.
Develop and pragmatically implement a clear and robust communication strategy. This is aimed at constantly and intentionally explaining the critical components of the Charter to the public and the private sector.[1] The government can leverage official and non-official channels to raise awareness, ensure public ownership, and ensure accountability and transparency.
This article does not aim at painting a pessimistic picture but to stress that the required fiscal transition could be difficult, thus, a clear, feasible and implementable plan is needed. The government must also guard against overly optimistic and ambitious strategies that are inconsistent with the fiscal risks, challenges, and uncertainties. Credibility is at stake when unrealistic commitments are made, and the likelihood of compliance is minimal – caution is of the essence.
[1] These include what the Charter is, why it is important, how it is implemented, when the government may have to deviate from it temporarily, and how the government can revert to follow the Charter.